Salary increase budgets and are near to historical lows, and are likely going even lower, due to the weak economic "recovery."  Growth in 2010 has been so tepid that unemployment has barely budged and employers have started to cut back their budget plans for 2011 (and even for 2010, if they haven't fully implemented them yet).

Early indications for 2010 salary increase or "merit" budgets were in the 3.0% vicinity or bit lower, but after a weak 2nd and 3rd quarter, it's looking lower than that, and at very low numbers historically.  The lowest annual salary increases ever recorded (since good records have been maintained) was in 2009, at about 1.5%, depending on who you ask.

Meanwhile 2011 budgets estimates are starting to head south, well before the year even begins, because nothing on the horizon indicates a quickening of the economic recovery or a firming of the labor market.

Below is data from several recently published surveys concerning merit and salary structure increases projected for 2010 and 2011.  Data from the Hewitt study ("exempt updated") is actual (not projected) data for 2010 that was just released in the past few weeks, showing the downward trend we have been predicting for some time.

Overall, we believe that 2010 will end up with pay increases in the 2.5% range.  We estimate that 2011 budgets will drop from the recently-projected 3.0% range, down to around 2.7% (+/-), depending on how the economy does in the next few quarters.

We expect to see some industry variation from the overall trends though, both in 2010 and  2011.  Some industries doing better than most, and they will likely have higher budgets than many other industries. Industries doing better than average include health care, technology, biotechnology, consulting, and some capital equipment sectors, etc.

We wish we could be more upbeat on the economy right now, but we feel it's better to be honest, than just plain wrong.  In future posts, we will discuss how employers can address the "tiny" merit budget issue, which tends to have a negative impact on the workforce (despite the economic realities), and especially on  top performers - the folks  employers want to keep the most.

Pay increases in 2009 were at an all-time low, at least since good records have been kept on this type of data. In 2009, over 50% of companies either froze pay or worse, by far the highest pay pull-back/retrenchment numbers I have seen in my 25+ year career in HR and compensation.

2010 portends to be a bit better for employees, but employers are still keeping a pretty tight clamp on their purse strings, and understandably so, with economic recovery still looking a bit tepid.  Predictions are for pay increase budgets of about 2.7% in 2010, a vast improvement compared to an average 1.8% increase in 2009, by far the lowest year on record. Both of these data points are from a recently released Hewitt report.

Variable pay budgets (budgets for incentive or "bonus" programs) are expected to remain stable at about 12% for 2010. While the 2010 variable pay budgets are about in line with 2008 and 2009, the long-term trend has seen a slow but steady upward march, and we at the StrategicPay Series expect that trend to continue.  In 1990, corporate variable pay budgets were about 5% of payroll, and today they are more than double that, while merit pay budgets have been at historically low levels since the 2001 recession. 

Hewitt expects variable pay budgets to slowly continue upwards.  In a study released in the spring of 2009, Hewitt predicted  an average variable pay budget of 16% of payroll and a base pay increase pay budget of 2.0% in 2020.

While, of course, no one knows what's going to happen 10 years into the future, the predicted trends are clear: continued pressure on fixed-cost compensation increases (i.e. base pay), combined with a continued willingness to pay for performance, in the form of variable pay.  We agree.

Another major salary budget survey (this one from Hewitt Associates)  is out and it shows that merit and variable pay budgets have largely stabilized for 2010. With the economy (but not the labor market yet) on the mend, it's likely that these numbers will approximate what we will actually see in 2010.

Projections made in 2007 for 2008, and again in 2008 for 2009, turned out to be completely off the mark, mostly because few saw the recession (or or its strength) coming. But barring another swoon, merit projections have largely stabilized and are now looking like they will hold in 2010, for the most part.  Thanks to our friend Ann Bares at the Compensation Force blog for lending us her graphic.

As you can see, compared to projections made months earlier, it looks like most employer budgets are headed for the 2.5% range +/- based on this sample of over 500 companies, mostly larger employers.

Variable pay budgets have held up fairly well too, with companies budgeting 11.2% of payroll for variable compensation for salaried exempt workers, down somewhat from 11.7% in the earlier study done by Hewitt. Other employment groups were virtually unchanged from the previous survey.

Despite the slight drop in variable pay budgets, the longer-term trend for variable pay has been steadily up, increasing from 6.4% in 1994 to 11.2% in 2010 for exempt workers.

Another encouraging trend is that far fewer employers are planning to freeze salaries in 2010, 17%, down from nearly half (48%) in 2009.  Our guess is that if the economy continues to stabilize and slowly improve, the prevalence of salary freezes will drop even further.   In addition 0% of companies in the study were planning salary reductions for 2010, vs. 10% in previous earlier survey earlier this year.

Hewitt predicts, and we agree, that merit budgets will remain constrained for some time, as employers put more emphasis on variable/incentive pay, and as employers continue to struggle with rapidly rising employee benefits costs, primarily in health care.